Topic 5 External Factors Higher Business Management 1
Learning Intentions / Success Criteria Learning Intentions External factors Success Criteria Learners should be aware of the impact that external factors might have on organisations and be able to offer solutions as to how the organisation might lessen the effect. Factors include: political, economic, social, technology, environmental, ethical competitive. 2
PESTEC External factors are those outwith the organisation s control. Changes in the external environment impact on how the organisation functions both positively and negatively. The acronym PESTEC (political, economic, social, technological, environmental, competition) is a useful way of remembering the different types of external factors. 3
Political Political factors that affect businesses include new legislations such as the national minimum wage and setting tax rates such as VAT or Corporation Tax. 4
Political influence A change in, or introduction of, a new law Funding to upgrade infrastructure (e.g. a new motorway or airport) A change in the amount of tax to be paid New government targets to protect the environment (e.g. to increase recycling by 10%) Positive impact New laws may increase sales and profit, e.g. opening hours of a bar. May reduce travelling time between destinations. Access to locations that were previously restricted may enable greater trade to take place. If income tax was to be reduced, consumers would have more disposable income that they could spend on products. An increase in taxes may benefit public sector organisations by providing them with extra funding they can invest in improving facilities for communities. The business will be seen as being socially responsible and can use this as part of the marketing campaign to enhance image. 5
Political influence A change in, or introduction of, a new law Funding to upgrade infrastructure (e.g. a new motorway or airport) A change in the amount of tax to be paid New government targets to protect the environment (e.g. to increase recycling by 10%) Negative impact Changes in policies and procedures could be costly in terms of money and time as staff may need to be retrained. There may be significant disruption during the construction phase that may impact upon the business. Stakeholders may not look favourably upon business that support the build of a new airport, especially it s aim is to be socially responsible. If income tax was to be increased, consumers would have less disposable income that they could spend on products, thereby decreasing the sales revenue of a business. An increase in tax for any business will reduce the amount of profit it earns and may reduce the dividend payment to shareholders. Steps may need to be taken by the business to comply with government targets, e.g. to reduce wastage, and may cost money to implement. 6
Economic Economic influences refers to anything that encourages people to spend or not to spend money. Economic factors that affect firms are inflation and unemployment, interest rates and exchange rates (if importing or exporting goods aboard). 7
Economic influence The number of people who are unemployed Change in the interest rate Changes to economic policies by government Positive impact If unemployment is high, a business will have a larger number of people they can recruit from to fill any job vacancies. If unemployment is low, people may have more disposable income they can spend on products, resulting in greater demand for a product. It is cheaper to borrow money when the interest rate is low and this may enable a business to borrow money to grow. Changes to economic policy may increase consumer buying power, thereby increasing demand for a business. 8
Economic influence The number of people who are unemployed Change in the interest rate Changes to economic policies by government Negative impact If unemployment is low, it may be more difficult to recruit people with the correct skills for a job vacancy. If unemployment is high, people may be more cautious when spending money and this could result in less demand for a product. If the interest rate is high, it is more expensive to borrow money. If the business is experiencing a cash flow problem and relies on loans, this could mean that suppliers do not get paid. Changes to economic policy might restrict the ability of banks to lend money and this may cause a cash flow problem. 9
Social Social factors that can affect businesses include fashions, tasks and trends, and also demographic factors such as the ageing population of the UK. 10
Social influence Changes in fashion trends and tastes Changes in demographics (the number of people who live in a particular location) Increase in the number of family-friendly arrangements employers need to offer Positive impact The business can take advantage of new opportunities by producing products that customers demand, thereby increasing sales. Customers who were previously unable to be accessed because of their location may now be easier to attract to the business, thereby increasing sales. It is easier to recruit employees who have the appropriate skills but who want to work flexibly (e.g. part-time or job-share), thereby increasing the potential number of employees from which the business can choose. 11
Social influence Changes in fashion trends and tastes Changes in demographics (the number of people who live in a particular location) Increase in the number of family-friendly arrangements employers need to offer Negative impact The business will need to invest money into carrying out market research to enable it to keep ahead of what people want; this will cost money and therefore reduce profits. It will be costly to set up new branches and offices in new locations, thereby reducing profit. It may not suit the requirements of the business to have employees working flexibly and additional employees may need to be provided, which is costly. 12
Technology Technology is changing very rapidly and has a huge impact on business, such as retailing online and e-commerce. More and more people are using technology to communicate with each other and to do business. 13
Some recent technological developments include: Tablet computers Wireless technology Web 2.0 Cloud computing S-commerce 4G The steady growth of applications (apps) that allow people to do business and communicate with each other shows their popularity on these devices (and also on mobile phones). This means using technology without wires while on the move. Many public transport operators provide wireless access to the internet for their passengers. This technology allows people to interact with each other, e.g. via social networking sites, blogs and wikis. It is popular with businesses for advertising their products and for communicating with customers. This is becoming popular in managing business information. Information is stored on the internet - in the cloud - and often means cheaper IT and staffing costs for a business. Buying and selling through a social networking site, e.g. Facebook. Fourth generation (4G) mobile technology will provide people with superfast broad band speeds through their mobile phone. It is slowly being rolled out across the UK, but will enable a business to communicate much more quickly and to down load information from the internet faster. 14
Technological influence New piece of technology becomes available (e.g. tablet computer) Growth of s-commerce (buying and selling through a social networking site) Positive impact This may allow tasks to be completed more quickly and therefore frees up time that can be spent on other tasks. This will increase the number of customers that can be accessed, thereby increasing market share. Updates can be made very quickly to social media sites, making communicating with customers instant. 15
Technological influence New piece of technology becomes available (e.g. tablet computer) Growth of s-commerce (buying and selling through a social networking site) Negative impact Technology can be expensive to purchase and maintain; this would result in less profit. Employees may require training in the use of technology, which can be expensive and time-consuming. Procedures and processes will be required to manage orders received via s-commerce; this could be timeconsuming to create and implement. Employees may require training in the use of s-commerce which can be expensive and time-consuming. 16
Environmental Businesses are becoming more aware of the need to be environmentally friendly and sustainable (in response to having to be more socially responsible) and are operating increasingly ethically. 17
Environmental influence Changes in the weather Increased pressure to recycle Positive impact Depending on the product being sold, a certain temperature may increase demand (e.g. demand for ice cream goes up when it is hot), thereby increasing sales. The business will be seen as being socially responsible and can use this as part of the marketing campaign to enhance their image. 18
Environmental influence Changes in the weather Increased pressure to recycle Negative impact Depending on the product being sold, a certain temperature may reduce the quantity of a product that can be supplied (e.g. a very wet summer would reduce the quantity of strawberries available be sold), thereby reducing sales. Bad weather might mean that orders cannot be delivered on time, resulting in unhappy customers. It will cost money to provide recycling facilities, thereby reducing profit. 19
Competitive (Ethical) Competitive factors is concerned with rival firms affect on a business. Imitation products and price wars are factors that can have a negative affect on profits. 20
Competition influence Positive impact New competitor entering the market Competitor introducing a new product Encourages businesses to provide loyalty schemes and reduce prices. This will give customers a wide range of products to choose from. It might give a business an idea that they can develop themselves even better to gain customers. 21
Competition influence New competitor entering the market Competitor introducing a new product Negative impact A business may have to provide discounts to customers to retain their loyalty and this can be costly. It will cost money to carry out market research to try and stay ahead of what competitors are doing and it might not always be successful. 22